Still in an Up Trend

08/25/2008 12:00 am EST

Focus: OPTIONS

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Lawrence McMillan, editor of the Option Strategist, says stocks are moving higher-until proved otherwise.

The broad stock market has been able to move higher, albeit in stuttering steps. There has been plenty of day-to-day volatility, with the Standard & Poor's 500 index (SPX) closing more than 15 points higher or lower on [many recent] trading days.

Despite that, a clear up trend exists on the SPX chart, and the 20-day moving average is now rising as well. That moving average and the trend line connecting the three recent lows are at about the same place-1270. Thus, as long as SPX remains above that line, the SPX chart will be bullish.

The equity-only put-call ratios remain steadfastly bullish. They are continuing to decline on their charts, [and] as long as they are declining, these charts are bullish. They are [now] only about midway down their charts, so there seems to plenty of room for the current market rally to continue, while these ratios work their way lower.

Most of the other broad market put-call ratios, such as OEX weighted, S&P 500 futures weighted, and [the Nasdaq 100] QQQQ weighted, are all on buy signals as well. In fact, QQQQ broke out to the upside, and is now bullish as well.

[Meanwhile,] market breadth has not been particularly strong. This is one of the reasons why we don't think the bottom has been seen. If this rally were truly the end of the bear market, breadth should have expanded greatly, driving the oscillators deeply into overbought territory and keeping them there.

But breadth didn't expand much at all. In fact, the New York Stock Exchange-based oscillator has not even reached overbought status yet. Volatility indices have bounced back and forth somewhat, but are generally working their way lower.

A down trend in the VIX is bullish, so this indicator is positive as well. Recently VIX has been bounced back and forth between 20 and 22. A close above 22 would be somewhat negative in that it would interrupt the down trend, and it would also be a close above the declining 20-day moving average.

In summary, we will remain long SPY and QQQQ positions as long as the up trends are intact in those indices. The fact that most of the other indicators are positive is strong supporting evidence as well. If you don't own any QQQQ calls, you can buy the September 47s (QQQIU).

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